which is the better vehicle for your business?
TRANSCRIPT
© 2021 Crowe Malaysia PLT 1
Audit / Tax / Advisory Smart decisions. Lasting value.
LLP or Sdn Bhd: Which is the better vehicle
for your business?
© 2021 Crowe Malaysia PLT 2
Limited Liability Partnerships are a new vehicle for doing
business since 2012. Many businesses use the LLP
vehicle, especially professional firms e.g. accountancy
firms, which are not allowed to operate as a Sdn Bhd.
In the past, these professional service firms used to
operate under a conventional partnership which suffers
from unlimited liability on the part of the partners should
the partnership enter into a capital deficit position
especially if the partnership gets sued.
In contrast, a Sdn Bhd provides a limited liability
structure where liabilities are limited to the share capital
of the company.
In this commentary, we will show the differences between
the use of an LLP and a Sdn Bhd. We will not comment
too much on their similarities or on minor issues.
© 2021 Crowe Malaysia PLT 2
Given the choice, which is a better vehicle to use when an entrepreneur wishes to embark on a business?
© 2021 Crowe Malaysia PLT 3
LLP
LLP formation costs are likely to be
about RM1,500 compared to
company formation costs of about
RM4,000. The savings are mainly
because of the lesser government
fees for forming a LLP (RM500)
versus government fees for
forming a Sdn Bhd (RM1,250).
Professional fees may be lesser
for forming a LLP due to a less
complicated process compared to
that for a Sdn Bhd. A specially
tailored constitution (previously
known as M&A or Memorandum
and Articles of Association ) for a
company and a LLP agreement for
a LLP can bump up the
incorporation costs of the
respective entities significantly due
to the legal fees involved.
For companies incorporated under
the Companies Act 2016, the M&A
is called the “Constitution”. For
companies incorporated under the
previous Companies Act 1965, the
M&A is still being referred to as
Memorandum and Articles of
Association.
Incorporation Costs
© 2021 Crowe Malaysia PLT 3
Sdn Bhd
Company formation costs are
about RM4,000.
© 2021 Crowe Malaysia PLT 4
LLP
An LLP generally has lower annual
maintenance costs because a LLP
does not need company secretarial
services or an annual audit.
However, if an LLP were to borrow
money from the bank, the bank
may insist on having audited
accounts. The necessity for tax
services will be the same for both
types of entities
Annual maintenance costs
© 2021 Crowe Malaysia PLT 4
Sdn Bhd
Sdn Bhds require an annual audit
and the services of a company
secretary. Audit fees vary depending
on the size of the company but
typically for a company with RM1
million turnover, the audit fees may
be about RM4,000. Company
secretarial retainer fees may be
approximately RM2,000 per year but
additional fees may be charged for
special exercises e.g. for issue of
shares or drafting of Sdn Bhds
require an annual audit and the
services of a company secretary.
Audit fees vary depending on the
size of the company but typically for
a company with RM1 million
turnover, the audit fees may be
about RM4,000. Company
secretarial retainer fees may be
approximately RM2,000 per year but
additional fees may be charged for
special exercises e.g. for issue of
shares or drafting of resolutions for
non-routine business activities.
© 2021 Crowe Malaysia PLT 5
LLP
The partners in a LLP are partially
protected against liabilities
because the LLP’s liability is
generally limited to the paid-up
capital of the LLP. However, an
LLP partner is personally liable in
tort without limit e.g. professional
negligence but the other LLP
partners are not personally liable.
Unfortunately, the LLP is liable to
the same extent as that partner in
tort and the liabilities of the LLP
shall be borne out of the property
of the LLP.
Nevertheless, partners in an LLP
still enjoy better protection than
partners in conventional
partnerships because all partners
in a conventional partnership are
exposed to unlimited personal
liability.
Protection against liabilities
© 2021 Crowe Malaysia PLT 5
Sdn Bhd
The shareholders and directors in a
Sdn Bhd are not generally exposed
to unlimited liability. The liability of
the Sdn Bhd is limited to the share
capital.
© 2021 Crowe Malaysia PLT 6
LLP
LLPs have simpler administration
processes and do not require a
company secretary unlike that for a
Sdn Bhd. However, a LLP requires
a compliance officer who is a
partner of the LLP or an external
company secretary. For good
administration, LLPs should still
maintain proper registers (e.g. of
partners), minutes of meetings, etc.
Administration Process
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Sdn Bhd
Sdn Bhds have more complicated
administration processes. Some
decisions made by a company
require informing the Companies
Commission of Malaysia (SSM) via
the submission of forms, etc.
Transparency
LLP
LLPs need to file an annual
declaration with the SSM within
90 days from the end of the
LLP’s financial year. The
declaration will contain certain
financial information of the LLP
such as revenue and profit after
tax for the year.
Sdn Bhd
Sdn Bhds which are exempt private
companies do not have to file accounts
with the SSM. These Sdn Bhds
therefore enjoy more privacy compared
to LLPs.
© 2021 Crowe Malaysia PLT 7
LLP
Both the LLP and the Sdn Bhd are
taxed in their own name. Although a
LLP is a partnership, it is taxed like a
company. Both LLPs and Sdn Bhds
enjoy the lower SME income tax rate
of 17% if conditions are met.
However, LLPs do not enjoy as
much tax incentives as Sdn Bhds
e.g. Reinvestment Allowance,
although they both enjoy certain tax
incentives e.g. double deduction for
Structured Internship Programme.
Income Tax of the Entity
© 2021 Crowe Malaysia PLT 7
Sdn Bhd
Sdn Bhds enjoy more tax incentives
Income tax of the partners / shareholders
LLP
Partners of a LLP are taxed in the
same way as the shareholders of
a Sdn Bhd in that both of these
parties are not taxed on their
dividends received. However, the
remuneration e.g. salaries and
bonus of LLP partners, are taxed
like those of an employee.
Remuneration to be paid to the
partners should be documented in
the LLP agreement in order to
obtain tax deduction.
Sdn Bhd
Sdn Bhds have simpler rules to comply
with in order to obtain tax deduction of
remuneration paid to directors
© 2021 Crowe Malaysia PLT 8
LLP
For professional service firms e.g.
audit firms which are not allowed
to be organised as a Sdn Bhd, the
LLP structure is appropriate and is
used by most of the large firms in
the country. Nevertheless, a LLP
is presently viewed as a vehicle
for small businesses until such
time when large LLPs start to
sprout in the market.
For Growth and Expansion
© 2021 Crowe Malaysia PLT 8
Sdn Bhd
Sdn Bhds have more credibility
because of the need to prepare
annual audited accounts and the
abundance of Sdn Bhds which are
large businesses. Sdn Bhds may
find it easier to raise funds generally.
Public companies (i.e. Bhds) are the
principal vehicles allowed for an IPO
(Initial Public Offering or listing) on
the stock exchange.
Ease of conversion from a conventional
partnership to an LLP or Sdn Bhd
LLP
A conventional partnership can
dispose of its business to a LLP
similar to that for a company.
However, this process involves
complications on transfer of
contracts, assets, liabilities, staff,
etc. Stamp duty will also be
applicable. Another route available is
the “conversion” of a conventional
partnership to a LLP provided by
Section 29 of the LLP Act. Under
this option, the properties, assets,
liabilities, clientele, contracts, etc.
will be automatically transferred to
the LLP. Stamp duty or real property
gains tax exemption which was
previously allowed has expired.
Sdn Bhd
There is no option for a conventional
partnership to be converted to a Sdn
Bhd. Instead, the partners in a
conventional partnership have to
dispose of their partnership business
(or parts of the partnership business) to
the Sdn Bhd. The sale may attract
stamp duty or real property gains tax,
as the case may be.
© 2021 Crowe Malaysia PLT 9© 2021 Crowe Malaysia PLT
If you have any queries on LLPs or require assistance in forming
an LLP or a Sdn Bhd, please feel free to contact us. Please note
that the information above is given without prejudice and users
should seek professional assistance before relying on any of the
information herein.
Overall, the choice between
using an LLP vs a Sdn Bhd
depends on the
entrepreneur’s objectives.
He may make use of the
above considerations in
arriving at his decision.
Conclusion
This article was written by Poon Yew Hoe, Managing Partner
of Crowe Malaysia PLT. Professionally, he specialises in
taxation and heads the tax division of the firm. Having been in
practice since 1983, Yew Hoe has diverse experience in
auditing, taxation and business advisory matters.
© 2021 Crowe Malaysia PLT 10
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